Dabur’s Q2FY17 earnings print was a mixed bag – disappointing on revenues, better on standalone margins/PAT but poor on consolidated. Weakness in growth metrics, both volume and value, was the key takeaway for us. Management indicated increased aggression on promotions ahead, a reflection of still-weak demand. EPS estimates see 3-4% cut and so does our price target (cut to R295 from R305 earlier).

Another weak quarter; below estimates on all fronts

We note Dabur has started reporting sales as gross (including excise) and hence our topline estimates are not strictly comparable (though excise in Dabur’s case is just ~1% of sales; to that extent miss would have been a tad higher versus our estimates). Disclaimer done, Dabur posted another set of weak numbers with consolidated revenue growth of just 1% y-o-y; domestic FMCG business grew 2.4% y-o-y (volume growth at 4.5%; implied ‘price’ deflation continued due to heavy promotional intensity); and international business posted 2.3% y-o-y decline. We note that barring oral care (volumes strong at 15%, value growth was flat), foods (up 15.2%), home care (up 20%) and skin care (up 7%) most other categories posted muted growth.

Standalone results: Revenues grew 2% y-o-y to R13.5 billion aided by 4.5% volume growth (broadly in line with estimates). Ebitda grew 9% y-o-y to R2.8 bn (5% above our estimates) aided by 130 bps y-o-y expansion in Ebitda margin to 21% on the back of higher GMs (up 100 bps y-o-y) and 30 bps reduction in A&SP (down 2% in absolute terms). Recurring PAT grew 18% y-o-y to R2.7 bn; we won’t read much into the beat as it was aided by sharp 60%+ jump in other income (one-off jump during the quarter due to MTM gains on treasury book).

Another round of EPS cuts; near term challenges keep us cautious—REDUCE stays

We have cut our revenue estimates by 3-4% for FY2017-19e (similar cuts at EPS level) as we bake in Q2 disappointment across several categories and higher deflation due to sustained promotional intensity (likely to go up in H2FY17). The likely-strong reported growth rates in H2FY17 (due to low base) and management guidance of 5-10% volume growth in H2FY17 (on a normalised base) may cap absolute downside in the stock, but near-term demand challenges, higher competitive intensity and potential volume impact (once Dabur pulls the plug on high promotional intensity) keeps us cautious on the stock.

Reduce stays with a revised target price of R295/share (from R305) as we roll-over to Sep-2018e. Key highlights